Equilibrium and Adverse Selection

Abstract

The nature of equilibrium in markets with adverse selection evoked considerable interest following George Akerlof's famous paper on the market for lemons. Whereas Akerlof argued that markets with adverse selection may yield no equilibrium, Charles Wilson has argued that multiple equilibria may result. In this paper, it is shown that if the distribution of quality follows some standard distribution, then a unique equilibrium will result. In the (less plausible) context of multiple-equilibria, conditions are derived under which both buyers and sellers will prefer higher price-equilibria.